New York Markets After Hours

Kraft lifts the lid on its grocery business

MattAndrejczak

SAN FRANCISCO (MarketWatch) -- Kraft Foods Inc.
KFT
is giving investors an inside look at its North American grocery business, the first glimpse of what the unit will look like after it is separated from the company's snacks business.

Bearing brands such as Kraft Cheese, Oscar Mayer meats and Maxwell House coffee, the unit to be called Kraft Foods Group has posted increased revenue for two consecutive years, generating 2011 sales of $18.7 billion, according to a regulatory filing late Monday. However, earnings and margins have been nicked by commodity costs.

Earnings from operations, which excludes divestitures, fell 2.5% to $1.8 billion last year. Earnings were $2 billion in 2009; operating margin dropped to 15.7% last year from 16.6% in 2010 and 17.2% in 2009.

Kraft announced last August that it planned to split into two independent companies by separating its global-snacks unit from its grocery business. The spinoff is scheduled to be completed by year-end.

Shares of Kraft have surged 22% since the company unveiled its spinoff plans. The transaction must be approved by regulators. Kraft's stock was down 0.2% at $38.31 a share in afternoon trading Tuesday.

Following the spinoff, the grocery company will assume $10 billion of debt and shoulder $4.4 billion of pension obligations. It wasn't clear from the filing if the debt will be inherited from Kraft's current $27 billion debt load.

Wal-Mart Stores Inc.
WMT, -0.34%
is its largest customer, making up 24% of total sales.

Advertising expenses as a percentage of total sales were 3% in 2011 and will likely go up, according to J.P. Morgan analyst Ken Goldman. The same measure is 9.8% at Kellogg Co.
K, +0.69%
7.9% at General Mills Inc.
GIS, +0.44%
and 6.8% at Hershey Co.
HSY, -1.48%
he said.

Kraft has told investors to expect the grocery-foods business to deliver strong cash flows and pay a competitive dividend.

While it is too early in the separation process to deduce what the future dividend will be, Kraft did show in the filing what the business was generating in free cash flow--money that can be used to pay a dividend. Free cash flow (operating cash flow minus capital expenditures) rose to $2.3 billion in 2011 from $380 million in 2010. It was $2.5 billion in 2009.

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